Dollar falls, euro gains, as FX markets become less worried about Ukraine

The dollar fell and the euro gained on Wednesday as markets took a positive view on peace talks in Ukraine, while the Japanese yen recovered from seven-year lows as traders speculated that officials were uncomfortable with its recent weakness.

Equity markets were up in the Asian session, continuing a pick-up in sentiment in Wall Streets as markets became hopeful that the Ukraine conflict could end – although this move ran out of steam as European shares opened in the red.

Russia promised on Tuesday to reduce its attack on Kyiv, but the United States said it had not seen “signs of real seriousness” from Russia in pursuing peace.

The dollar extended its losses on Wednesday, as investors changed their mind on their defensive bets.

The dollar index was down 0.5% on the day at 97.90, having touched a 12-day low in early European trading.

The euro rallied against the dollar, with the pair up 0.5% at $1.1145.

Heavily sold on fears of the economic fallout from the war in Ukraine and nerves about the risk of the conflict spreading west, the euro has been a beneficiary of hopes for peace.

“Markets appear to have taken an optimistic stance well before peace talks have yielded any result,” ING FX strategists wrote in a note to clients.

“The FX market may be increasingly detached from trading the Russia-Ukraine situation and start to catch up with the wide moves in rate and growth differentials, all of which point to a stronger dollar.”

Investors expect the U.S. Federal Reserve, which raised rates by 25 basis points at its March 16 meeting, to be more hawkish than the European Central Bank, driving the dollar higher against the euro.

Philadelphia Federal Reserve President Patrick Harker said on Tuesday he favored a “methodical” series of quarter-percentage-point interest rate increases, but is open to larger half-percentage-point hikes if inflation does not soon show signs of easing.

The U.S. Treasury yield curve, widely watched as a barometer of the economy’s health, briefly “inverted” on Tuesday in a warning sign bond investors see a recession on the horizon.

In Europe, investors are watching for inflation data. Spain’s flash CPI data for March showed prices rising at their fastest since May 1985.

The yen staged a recovery from its recent seven-year lows, after a meeting between Bank of Japan (BOJ) Governor Haruhiko Kuroda and Prime Minister Fumio Kishida added to speculation about the level of official discomfort with a falling yen.

“While the comments from Japanese officials overnight are unlikely to reverse the yen weakening trend on their own, they should at least help to slow the recent fast pace of yen selling that has been evident over the last couple of weeks,” wrote MUFG analyst Lee Hardman in a note to clients.

The yawning gap between a hawkish Federal Reserve and a dovish Bank of Japan has driven the yen’s drop and on Wednesday the BOJ extended bond purchases along the curve as part of its effort to defend a 0.25% 10-year yield target.

The dollar was down 0.8% on the day versus the yen, at 121.86, compared with the pair’s recent high of 125.105 hit on Monday.

Yen tumbles as Bank of Japan intervenes to keep bond yields pinned down

The Japanese yen slipped to a six-year low on Monday, after the Bank of Japan stepped into the market to stop government bond yields from rising above its key target, while bitcoin jumped to nearly its highest this year.

The BOJ, on Monday morning offered to buy unlimited amounts of 10-year Japanese government bonds (JGBs) at 0.25%, after the 10-year JGB yield crept up to a six-year high of 0.245%.

The dollar rose to as high as 123.1 yen in morning trade, its strongest since December 2015, and was last at 122.9, up 0.7% on the day. It has climbed nearly 6% on the yen in the last 12 sessions.

“The market sees monetary policy divergence between the U.S. and Japan as the key driver of dollar-yen, so in contrast to the hawkish Fed comments recently, the (BOJ’s action) gives the impression that the BOJ remains dovish, and that’s leading to a higher dollar-yen,” said Shinichiro Kadota, senior currency strategist at Barclays in Tokyo.

“I think the risk is still to the upside in the near term, especially if this monetary policy divergence story stays intact. But the speed has been quite fast and it does seem a little overheated, so if we see any contrary headlines, we could see some correction as well,” he added.

The 10-year Treasury’s yield was last 2.5046%, having jumped 33 basis points last week.

High commodity prices are also hurting the yen as they contribute to a widening of Japan’s trade deficit, though at the same time they have provided a powerful impetus to commodity currencies.

The Aussie dollar was at $0.752 holding near last week’s four-month high, while the Canadian dollar was at 1.249 per dollar, just off Friday’s two month peak.

Aussie currency watchers are also looking out to Australia’s budget on Tuesday. Australia’s Treasurer said on Sunday the budget would mark a very significant material improvement to the government’s bottom line.

One possible headwind for the Aussie is the COVID-19 situation in China, after Shanghai said on Sunday it would lockdown the city to carry out COVID-19 testing.

The dollar climbed as much as 0.24% on the offshore yuan on Monday morning to 6.3986, before paring gains.

The euro was last at $1.0956, down 0.25% having edged slightly lower in recent days, still under pressure because of the economic impact of the war in Ukraine.

“The balance of risks suggests EUR/USD may test 1.0800 in coming weeks,” said analysts at CBA.

Inflation figures from major European economies and the eurozone are due from Wednesday, and “the European Central Bank is in a bind with growth headwinds and very high inflation,” CBA said.

Sterling was 0.19% softer at $1.3157.

The dollar index was 0.23% higher at 99.079.

Also potentially driving the dollar this week is Friday’s non farm payroll data in the U.S., though given the market is already positioned for an aggressive pace of rate hikes this year, its effect could be muted say analysts.

In cryptocurrency markets bitcoin was sitting pretty around $46,900 after jumping to as high as $47,766 in early trading, its highest level since early January.

Ether, the world’s second largest cryptocurrency, was at $3,320.

Yen slides through 120 as U.S. hike path steepens

The dollar was buttressed by new bets on U.S. rate hikes on Tuesday, while investors unloaded yen and sent it spearing below the psychological 120 level as the Bank of Japan looks increasingly isolated in its dovish policy stance.

The yen fell 0.8% and hit a six-year low of 120.46 in the Tokyo afternoon, having lost more than 4% on the dollar this month as leaping U.S. yields and a deteriorating trade balance suck cash from the world’s third-biggest economy.

Yen crosses also suffered, with the euro making a five-week high of 132.33, while the Japanese currency slumped to a four-year low on the Aussie and a 6-1/2 year low on the Swiss franc.

Japan must maintain ultra-loose monetary policy lest inflation hurt the economy, BOJ Governor Haruhiko Kuroda said on Tuesday — a stark contrast with hawkish overnight comments from Federal Reserve Chair Jerome Powell.

“Rising energy prices and higher U.S Treasury yields are both bad news for the Japanese yen,” said analysts at Singapore’s UOB in a quarterly outlook note that lifted their year-end dollar/yen forecast from 119 to 121.

Powell had sent U.S. yields to multi-year highs by putting the possibility of 50 basis point (bp) rate hikes on the table.

Fed funds futures moved to price in a 2/3 chance of a 50 bp hike in May and now anticipate the benchmark rate — currently below 0.5% — exceeding 2.5% in 2023.

Two-year, five-year, 10-year and 30-year Treasury yields all stood at their highest since 2019 on Tuesday, widening the gap on pinned Japanese yields while lending the dollar broad support elsewhere.

The euro was down 0.2% to $1.0988. The Aussie and kiwi each dipped 0.1%.

The U.S. dollar index rose 0.2% to 98.700. Sterling eased 0.2% to $1.3144.

The Chinese yuan was also under some pressure and has pulled back from early-month highs as investors await promised monetary easing. It last traded at 6.3648 per dollar onshore.

“Although the Chinese central bank left 1-year and 5-year loan prime rates unchanged … on Monday, we still expect the (People’s Bank of China) to lower the reserve ratio requirement by 50 bp again, as early as Q1 2022,” Scotiabank strategist Qi Gao said. “We maintain our short USD/CNH spot position.”

Cryptocurrencies were bid on Tuesday with bitcoin up 5% at a three-week high of $43,337.

Gold steady as dollar dip counters Fed rate hike expectations

Gold steadied on Wednesday, with a weaker dollar offsetting pressure from higher U.S. Treasury yields as investors await the first pandemic-era U.S. Federal Reserve interest rate hike.

Spot gold was flat at $1,917.91 per ounce at 1015 GMT, after touching its lowest since March 1 at $1,906 on Tuesday. U.S. gold futures fell 0.3% to $1,923.40.

“Bullion bears are taking a breather as they await the Fed’s highly-anticipated policy guidance,” Han Tan, chief market analyst at Exinity, said.

“Once gold markets have fully digested the Fed’s policy signals, attention could swiftly return to the ever-evolving Russia-Ukraine war,” Tan said, adding that any escalation of the crisis would lead to further gold price rises.

The U.S. central bank is expected to announce its first interest rate hike in three years to tackle soaring inflation.

Gold is highly sensitive to rising U.S. interest rates, and consequently higher yields on benchmark U.S. 10-year Treasury notes, which increase the opportunity cost of holding non-yielding bullion.

Gold was holding up well despite a wider risk-on sentiment, said Quantitative Commodity Research analyst Peter Fertig.

“If there is disappointment that the market has expected more rate hikes that the Fed actually delivers, this could be supportive for gold, and vice-versa,” Fertig added.

The U.S. dollar dipped, providing some support to greenback-priced bullion.

A fundamental change that could take place after the Ukraine crisis ends is higher gold purchases from central banks of countries that are not aligned with the West, as they seek to diversify away from assets like the euro and dollar, said Bernard Dahdah, an analyst at Natixis.

Ukraine’s President Volodymyr Zelenskiy said on Wednesday that peace talks were sounding more realistic, even as Russia’s invasion continued, but more time was needed.

Spot silver eased 0.5% to $24.74 per ounce, while platinum rose 2.7% to $1,012.55.

Palladium gained 2% to $2,471.55, inching away from a Monday’s more than two-week low, amid receding supply fears.

Euro wavers as traders await EU policy response to war in Ukraine

The euro gave back some of its overnight gains on Thursday, after its biggest daily jump since 2016, as traders waited for the European Central Bank and European Union leaders to shed light on the bloc’s policy response to Russia’s invasion of Ukraine.

The common currency on Wednesday benefited from a risk-on shift in sentiment that lifted equity markets and bond yields and saw oil prices drop amid optimism about diplomatic efforts to resolve what the Kremlin refers to as a “special operation” to disarm Ukraine.

The euro has been widely seen as a gauge of Europe’s biggest security crisis since 1945 and touched a 22-month low of $1.0804 earlier in the week, with investors expecting a sizeable impact on European growth.

The foreign ministers of Russia and Ukraine met on Thursday in Turkey, the highest level contact between the two countries since the war began on Feb. 24, but in simultaneous duelling news conferences made clear they had made no progress.

At 1128 GMT, about an hour ahead of the ECB meeting, the euro was trading at $1.1046 , down 0.28% after jumping 1.6% on Wednesday, its best day in nearly six years.

ECB policymakers may give clues about how they intend to balance the risk of higher inflation with the damage war in Ukraine will cause to economic growth.

“We think that normalization of monetary policy is likely to be delayed but not derailed,” Unicredit analysts wrote in a morning note.

Investors currently expect the central bank to gradually phase out its pandemic bond-buying scheme and hike its key interest rate by a total of about 33 basis before the end of the year.

The ECB is trailing other major central banks such as the U.S. Federal Reserve and the Bank of England in the post-pandemic tightening cycle, which has weighed on the euro.

Georgette Boele, an FX strategist at ABN AMRO, said in a note she expected the euro to continue on its downward trend and move lower or even below parity with the dollar.

Recent speculation that EU leaders were considering joint bond issuance to finance energy and defence spending have, however, boosted the currency. The bloc’s summit will begin later today in Versailles, west of Paris.

The dollar index was up 0.19% after falling 1.17% on Wednesday and traders were waiting for U.S. inflation figures, also due later in the day, to further guide expectations for the Federal Reserve’s meeting next week.

While the Fed is widely expected to raise its benchmark overnight interest rate by a quarter of a percentage point, growing calls before the war for a larger half a percentage point rise have quietened.

Economists polled by Reuters forecast the U.S. Consumer Price Index to have climbed 7.9% on a year-on-year basis in February, up from 7.5% in January, although this data will only show a preliminary impact from the surge in oil prices caused by the conflict.

Elsewhere, sterling was down 0.18% at $1.3163 after jumping 0.65% overnight along with the euro, while the safe-haven yen was at 115.95 per dollar, close to its lowest in a month, hurt by a rise in sentiment towards riskier assets like equities.

Bitcoin fell nearly 7%, erasing most of the gains it made the previous day after U.S. President Joe Biden’s executive order requiring the government to prepare reports on the future of money calmed market fears about an immediate regulatory crackdown on cryptocurrencies.

Asian stocks rallied on Thursday, echoing overnight gains on Wall Street where a tumble in oil prices sent stocks higher

Euro slides as war in Ukraine stokes fears of inflationary shock

The U.S. dollar climbed on Monday as investors weighed the repercussions of a potential U.S. ban on Russian oil imports and gas.

The euro fell as much as 0.61% on the dollar and hit $1.086, while the U.S. dollar index hit a 22-month high and was last up 0.56% at 99.22.

Meanwhile, commodity currencies were swept to multi-month peaks as the war in Ukraine briefly sent oil prices spiking to multi-year highs and stoked fears of a stagflationary shock that could hammer Europe.

The euro is down almost 4% since Russia began what it calls a “special military operation” in Ukraine and is not far from testing its 2020 trough of $1.0636. It also briefly fell below one Swiss franc for the first time since the Swiss quit their euro peg in 2015, hitting 0.9970 before jumping to 1.0051.

“The euro is being picked on,” said Sean Callow at Westpac in Sydney. ”(The war) is on Europe’s doorstep,” he said.

The euro briefly dropped Monday to its lowest since mid-2016 on the pound at 82.01 pence. Sterling has also been weighted by gloom over Europe’s outlook and fell 0.9% against the dollar. Euro/dollar volatility gauges are at their highest since March 2020.

Supply shock
The conflict and harsh western sanctions on Russia have sent Russian assets tumbling and prices of Russian exports such as precious metals, oil and gas soaring at a time when the global economy was already grappling with inflationary pressures.

“This is very bad news for global growth – particularly Europe, given their dependence on gas from Russia,” ANZ analysts said in a note.

Among gainers, the Australian dollar briefly cracked January’s peak to scale a four-month high of $0.7440. The New Zealand dollar also cleared a January top to reach $0.6926.

The U.S. dollar rose against the swiss franc and the yen. It was last up nearly 1% on the franc at 0.9256 and about 0.42% higher on the yen at 115.26.

The European Central Bank, which meets on Thursday, faces a complicated picture as inflation and growth pressures bear down and economists reckon it will wait until late in the year to move rates higher.

Dollar gains on euro as Ukraine crises clouds euro zone outlook

The dollar edged higher against the euro on Wednesday, as investors worried about the impact of an escalating conflict in Ukraine on the euro zone’s economic prospects, while commodity-linked currencies strengthened.

The Russian ruble extended its recent slide to hit record lows in Moscow trade as stinging Western sanctions over Moscow’s invasion of Ukraine pummeled Russia’s financial system.

“Developments around the war in Ukraine will remain the main driver of euro price action for the session,” said Shaun Osborne, chief currency strategist at Scotia Bank.

“A continued escalation of conflict with no clear off-ramps for Russia is pulling the euro toward a test of 1.10 in the coming days,” Osborne said.

The euro was 0.1% lower against the dollar, after slipping to a fresh 21-month low of $1.1059, earlier in the session.

“We believe investors should underweight the euro area in both the currency and the equity space given its vulnerability to any further escalation,” analysts at JP Morgan said in a note on Wednesday.

Meanwhile, the U.S. Federal Reserve will move forward with plans to raise interest rates this month to try to tame inflation, even as the outbreak of war in Ukraine has made the outlook “highly uncertain”, Fed Chair Jerome Powell said on Wednesday.

“Judging from just his testimony… it’s pretty much in line with our view that the Federal Reserve is going to hike rates at the next meeting,” said Bipan Rai, North American head of foreign exchange strategy at CIBC Capital Markets, in Toronto.

The U.S. dollar currency index, which tracks its performance against six major currencies, was up marginally at 97.43. The index climbed as high as 97.834, its strongest since June 2020, earlier in the session.

Data on Wednesday showed U.S. private employers hired more workers than expected in February and data for the prior month was revised sharply higher as the labor market recovery gathers steam.

Commodity-linked currencies, including the Canadian, the Australian and the New Zealand currencies were firmer as investors expect to benefit from higher commodity prices.

Oil prices jumped to their highest levels in more than a decade, wheat popped to 14-year peaks and aluminum, benchmark Dutch gas and European coal contracts hit record highs as Western sanctions on Russia over its invasion of Ukraine disrupted Russian commodities exports.

The Aussie was 0.61% higher, while the loonie was 0.7% higher.

“Whether or not that continues depends really on whether or not we continue to see this move higher in oil prices,” CIBC Capital Markets’ Rai said.

The Canadian currency extended gains after the Bank of Canada on Wednesday raised interest rates by 25 basis points to 0.50% in its first hike since October 2018, and said it would continue with the reinvestment phase of its bond buying program.

Canadian dollar pares gains as Ukraine tensions climb

The Canadian dollar strengthened against its U.S. counterpart on Wednesday but gave up much of its advance as rising Russia-Ukraine tensions weighed on investor sentiment.

The loonie was up 0.2% at 1.2740 to the greenback, or 78.49 U.S. cents, after earlier touching its strongest level since last Friday at 1.2683.

“Recent trading has made it clear that the broader risk mood is the essential driver for the CAD at the moment,” strategists at Scotiabank, including Shaun Osborne, said in a note.

U.S. stocks were sharply lower and the safe-haven U.S. dollar gained ground against a basket of major currencies as Ukraine declared a state of emergency and the West unveiled more sanctions against Russia over its move into eastern Ukraine.

Sanctions were not yet expected to disrupt oil supplies, helping to cap the price of oil, one of Canada’s major exports, after it notched a seven-year high on Tuesday. U.S. crude prices settled 0.2% lower at $92.10 a barrel.

Other commodity-linked currencies also gained ground, including a 5-week high for the New Zealand dollar as the country’s central bank hiked interest rates as expected and signaled a more aggressive path forward than even the most hawkish investor had wagered.

The Bank of Canada is expected to hike next Wednesday for the first time since October 2018.

Canadian government bond yields were higher across the curve, tracking the move in U.S. Treasuries. The 10-year rose 5.1 basis points to 1.977%, approaching last Wednesday’s three-year high at 1.995%.